Which of the Following Is a Reason Why the Stock

question 38

Multiple Choice

Which of the following is a reason why the stock price of a firm might drop when a seasoned equity issue is announced?

• A) Managers know the stock is overvalued, so they are selling it while the price is low.
• B) Issuing new equity may indicate the firm has too little debt or excess liquidity.
• C) Stockholders are just acknowledging the fact that if the firm were to issue debt instead, existing shareholders would have to share the gain with the new investors.
• D) It is expensive to issue securities and stockholders are just recognizing the loss in value the firm will incur by paying out this money.
• E) There may be a simple supply and demand problem, that is, the additional share will be in great demand and price usually drops when demand rises.

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Definitions:

Investment Account

An account held at a financial institution that holds securities, cash, and other investments, used for the purpose of long-term or short-term investing.

Carrying Value

The amount at which an asset is recognized on the balance sheet after deducting accumulated depreciation and impairment losses.

Inventory

Goods and materials that a business holds for the ultimate goal of resale.

Declared Dividend

A dividend that has been announced by a company's board of directors to be paid to shareholders on a specified date.